By Howard Schneider

WASHINGTON (Reuters] – The nomination of U.S. president Joe Biden for the Federal Reserve chair is imminent. This nominee will inherit an economy that promises the strongest annual growth since the 1930s. There are strong job opportunities, wages rising to the bottom-paid and cash flowing into household accounts.

Their legacy will also include a world where housing, cars and food are steadily becoming more expensive. Whether it is current Fed Chair Jerome Powell seeking a second 4-year term, or Lael Brainard being promoted, managing that inflation shock comes with risks to the Fed, the economy, and the president.

Rising prices have already begun to sour the public mood https://www.reuters.com/world/us/us-consumer-sentiment-plunges-10-year-low-inflation-worries-umich-2021-11-12, pushing Biden’s approval numbers to the lowest point of his presidency, cited in polls as a concern that crosses party lines and income brackets and which is shared even among those for whom higher prices have been offset by ongoing government payments.

It has created a new problem for the Fed: tangled global supply chain, an uncertain and possibly diminished U.S labor market and rising prices that could force them to increase interest rates and slow economic growth. This will be before the economy regains the same jobs and workforce levels as before the coronavirus epidemic.

Biden, the Fed and others hoped that this choice could be avoided to encourage job growth and drive deeper economic expansion. The expectation was that inflation would behave in the same manner as before the pandemic. This hasn’t happened.

“Six percent inflation is not the right level of inflation, we can all agree on that,” said Nela Richardson, chief economist for payroll processor ADP, citing recent consumer price increases, at a 30-year high, that have wiped out rising wages and far outstripped the Fed’s 2% target.

Richardson indicated that while the Fed believes that a rapid pace of price increase will be temporary, Richardson noted that wealthy consumers still have the luxury to afford it. “Low-income less-skilled consumers do not. Although I appreciate the temporary argument, it isn’t the best choice for everyone. Inflation sours sentiment for U.S. consumers, https://graphics.reuters.com/USA-ELECTION/zdvxonkmbpx/chart.png

“A Lot of Constinuity”

Biden stated Tuesday that he will make a decision about the Fed within four days. Biden’s term expires February 31st. Whether Biden picks Powell or Brainard, both were interviewed. The nominee must go through confirmation and then vote in the closely divided Senate.

The process began with a clear choice – either stick with Republican Powell to maintain continuity and bipartisanship, or tap the Democrat Brainard in order to reward supporters and seek a wider remake of the central banking institution – but it has become more complicated.

These two central bankers are experienced and well-connected. They have collaborated for many years to reshape Fed policy in order to place more emphasis on job creation and permit higher inflation. Each will need to grapple with the exact same dilemma in the months ahead: how to allow inflation risks to run before taking actions.

No matter what outcome, there will be continuity in Fed policy. On Tuesday, James Bullard, President of the St. Louis Federal Reserve said that both players had a long record.

Politically, the Fed has had to shift its primary focus from jobs to job creation. Now the Fed must be more focused on the President and his party’s fortunes.

INFLATION A VERY BIG CONCERN’

Objectively, everything is moving well. The economy added more than half a million jobs in October https://www.reuters.com/business/subsiding-delta-wave-seen-boosting-us-job-growth-worker-shortages-still-2021-11-05/#:~:text=Economists%20polled%20by%20Reuters%20had,reopened%20for%20in-person%20learning and analysts expect strong employment growth ahead given the near-record number of openings reported by firms and the willingness to offer higher wages.

Households are still sitting on large cash balances as a result of pandemic stimulus programs – and are willing to spend based on retail sales https://www.reuters.com/business/us-retail-sales-beat-expectations-october-2021-11-16 that continued strong in October. Children’s families are being paid monthly, which has reduced poverty rates. This should help to lessen the impact of rising food and gasoline prices.

Biden, however seems to have received little credit or none for this. According to a recent Reuters/Ipsos survey, inflation was cited as a major concern by Republicans and Democrats alike. The opinion didn’t differ much by income level or education, nor among parents. Many of these receive child tax credits.

Republicans have made the issue a top priority for the next year’s midterm elections. However, some Democrats economists and lawmakers have also called on Fed to take tougher actions.

Like many central banks, the Biden administration believes that the current inflation is temporary and a result of boosting the global economy following the pandemic.

But a Biden adviser said fears about inflation and the economy in general were the main reason for Biden’s decline in the polls in recent months – and that it was incumbent on Democrats to show they understand the issue and are trying to solve it.

We are not sure how that will affect the Fed decision.

Brainard may seem more “dovish”, and willing to take more time in raising rates. She is a Phd-economist who knows the dangers of inflation spiralling and will not allow it to happen under her guidance.

Powell, who is an attorney for private equity but converted to the strategy to push broad employment gains may find it easier to be confirmed. There has been support among Senate Republicans already.

Biden stated last week that “many people are still uneasy about the economy. And we all know why.” They see rising prices. Then they go to the stores…or shop online but can’t seem to find what they need and when they want. These issues are being tracked and we’re trying to find solutions.